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(^350) Financial Management
(2) the period within which payment must be made if the cash discount is to be
allowed; and
(3) the maximum period that can elapse before payment of the net invoice price is
required if the cash discounts is not taken.
It is important to distinguish a cash discount ó from both a quantity discount and a
functional discount. A quantity discount generally expressed as a percentage reduction
form a list price-is given for purchasing certain minimum amounts of a particular item.
Functional discounts are differential discounts given to different types of customers ó
a wholesaler, for example, may be given a larger discount than a retailer.
Terms of trade credit, which vary from industry to industry, are specified on each
invoice and may be categorised according to both the net period within which payment
is expected and the terms of the cash discounts allowed. In general, cash discounts
could be set as high as 10 % but the average is closer to 2 to 6 percent; the discount
periods are usually fairly short, in most cases 10 or 20 days.
CBD And COD
ìCash before delivery (CBD)î and ìCash on delivery (COD)î are two common forms
of payment. Under CBD, as buyer must pay for the goods before the supplier will ship
them, when a supplier imposes these terms, he either knows nothing at all about the
buyerís creditworthiness or, more frequently, he knows ìtoo muchî about the customerís
unreliability in managing his business affairs. In the latter circumstances, to eliminate
the risk of non-payment completely, he may even wait for the customerís check to
clear even before shipping the order. Under COD, supplier will ship the goods ordered,
but the buyer must pay for them before taking possession. The only risk involved
with COD is that the customer may refuse the shipment and the seller will have to
pay shipping costs both ways. Transactions completed under either CBD or COD
terms are considered cash transactions since suppliers are required to extend no credit
at all.
Net-terms, no cash discount
When net terms are quoted, the supplier specifies the period permitted for payment in
full payment. For example, ìnet 30î means that the amount of net invoice must be paid
in full within 30 days. If the seller bills on a monthly basis, he may stipulate such terms
as ìnet 15 EOM,î meaning that all goods shipped before the end of the month must be
paid for in full by the fifteenth of the following month. Sometimes, ìbill-to billî terms are
specified, that is, the bill for a previous delivery is collected at the time a new delivery
is made.